With the stock market revival, the primary market is also witness to the boom with the launch of much awaited IPO from a known stable after a long gap. Mahindra Holidays & Resorts have launched their IPO, open between June 23-26 to raise Rs 162-192 crore at a price band of Rs.275-325.
After the IPO, the stake of Mahindra & Mahindra in Mahindra Holidays & Resorts will fall from 93.6% to 83.1%. The company has total 27 resorts and is in process of building 4 more resorts.
The business model of company is based on vacation ownership which is a niche segment in India. It takes membership fees of Rs.2.5 lac of which 60% is non-refundable. Apart from it, there is on an average annual subscription charge of Rs.8000 each year. Currently, the company has around 1 lac members with an average growth of 33% over the years and is expected to increase with the increase in disposable income.
However the valuation of IPO is highly priced in as the PE multiple works out to be 23-27 times next year’s earnings and 29-34 times current year’s earnings. And when compared with competitors like EIH, Indian Hotels and Country Club, the valuation look expensive.
Moreover in recession, discretionary spending usually witnesses a fall which may result into lower occupancy and profits. The business model may also lack novelty as customers may be averse to stay in similar types of resorts for their holiday each year.
But the positives side is that the company is backed by a strong group which has a proven track record and also has a first mover advantage in concept of vacation ownership in India.
The benefits may be reaped in future once the economic cycle takes an upward turn leading to better margins. The business model also has scope for sustainable revenues and growth opportunity in future.
Although, the increase in subscriber base may also force the company to build further capacity as the current capacity would be inadequate to accommodate all of its members leading to consumer dissatisfaction.
So, investment is only advisable if one has a long term horizon and is betting on the impending tourism boom in India.